Investors Grow Flexible on Mods

Servicers are quickly adopting new strategies and tactics as they try to balance borrower and investor interests, according to several servicing executives who are trying almost anything to stem rising defaults and foreclosures.

In the past, servicers would put a borrower into an 18-month repayment. But those plans don't work anymore and generally the borrower starts falling behind by the seventh month, according to Deborah Oakley, senior vice president of home preservation at National City Mortgage.

"Investors realize that," she said told a Consumer Bankers Association conference. So now the borrowers are being pushed into a loan modification if it looks like a prepayment plan isn't going to work after three or four months.

And investors are more willing to accept interest rate reductions and delegate that authority.

"If it's at 8%, bring it down to 6%. If that doesn't work, bring it down until it works," the NCM executive said. Ms. Oakley is based in Cypress, Texas.

Servicers also are extending terms and reducing the principal, she said. Some are using balloon modifications where the balance is written down to fair market value. This negative equity is placed in an interest-free balloon that comes due when the note is paid off.

In addition, servicers are using a combination of loss mitigation tools and filing advance claims with the mortgage insurer. "Things are being put in combination to make it work," Ms. Oakley said.

Wells Fargo Bank does a lot of loan modifications on a "trial" basis, vice president Joe Ohayon told the CBA Community Reinvestment Act conference.

"We put the borrower on the equivalent of a modified payment for three months," he said, "before we actually modify the terms in the pool." If it's successful, "we modify the terms on a permanent basis," he said.

Servicers like HSBC and Wells Fargo also are trying to find ways to deal with troubled loans with second mortgages, which continues to be challenge.

"In cases where the borrower has two mortgages and we are only servicing one, we are actively transferring those customers at the end of a conversation right into the loss mitigation shop of the other servicer," HSBC vice president Paul O'Leary said. He noted that lenders and servicers are "more receptive" to taking those calls these days.

"Sometimes it works and sometimes it doesn't," the director of default administration admitted. But he stressed that servicers need to address the "whole challenge" facing the borrower. Mr. O'Leary works out of HSBC's Elmhurst, Ill., office.

Wells Fargo Bank's servicing unit in Frederick, Md., will use cash incentives to get the second-lien holders' approval for short sales or loan modifications, Mr. O'Leary said.

If Wells Fargo services both the first and second loan, he said, one group works exclusively on that portfolio. "That way we are looking to negotiate both the first and second for modifications."